Short and Long-Run Effects of Public Investment: Theoretical Premises and Empirical Evidence

Abstract

This survey focuses on the impact of public investment as an instrument of economic policy. The study presents and analyzes features and results of the empirical works on this theme taking into account both theory and estimations issues. In general, the studies surveyed support the idea that public investment, if projects are properly selected, raises output and welfare through both demand and supply effects and thus should be the instrument of choice of economic policy for governments and public agencies. Moreover, a considerable amount of empirical studies show that public investments have higher positive growth effects than public consumption both in the short and in the long run. In spite of a great diversity in the theoretical approaches and the empirical results, the studies surveyed tend to converge in many indications that can be useful to policy makers. Among these, in addition to several pointers on the reasons why public investments may be made more effective, is that a major challenge is to provide a new generation of global public goods for sustainable development.